The 3-month yield however is now just under the Central Bank’s repo rate of 7.50 percent, amid excess liquidity in the market.

Interest rates in an economy need to match credit demand. If a central bank injects paper money reserves into the banking system to keep rates down, it creates an imbalance between savings and credit eventually leading to an economic bubble that bursts.

Sri Lanka’s interbank markets have seen a flood of liquidity as loose monetary policy of the US Federal Reserve was ‘imported’ through a dollar peg, after confidence in the currency anchor was restored in March with a float.

People’s Leasing, Sri Lanka’s largest leasing firm said it had also seen a 15 percent increase in monthly lease disbursements.

Government bond yields however started to move up before bonds, from around the second week of November. Medium term bond yields which fell to single digit levels are now around 11.00 percent.

Fiscal policy had also deteriorated amid election spending.

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